An heuristic scree plot criterion for the number of factors

Ard H. J. den Reijer, Pieter W. Otter and Jan Jacobs
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Ard H. J. den Reijer: Sveriges Riksbank
Pieter W. Otter: University of Groningen

Statistical Papers, 2024, vol. 65, issue 6, No 26, 4000 pages

Abstract: Abstract Cattel’s (Multivar Behav Res 1:245–276, 1966) heuristic determines the number of factors as the elbow point between ‘steep’ and ‘not steep’ in the scree plot. In contrast, an elbow is by definition absent in points on a hyberbole with corresponding equisized surfaces. We formalize this heuristic and propose a criterion to determine the number of factors by comparing surfaces under the scree plot. Monte Carlo simulations shows that the finite-sample properties of our proposed criterion outperform benchmarks in the dynamic factor model literature.

Keywords: Factor model; Number of factors; Scree test (search for similar items in EconPapers)
JEL-codes: C32 C52 C82 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00362-023-01517-x

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